TELECOMS: 5G Buzzes Early Into China

Bottom line: A bevy of signals from Beijing
indicate China will roll out 5G networks around 2020, in step with
major Western markets, providing a boon for telcos, equipment
sellers and Internet companies.

China gets serious on 5G

After years of watching China following years behind the West in
rolling out its next-generation wireless networks, there are
growing signs that the country intends to be a leader rather than a
laggard with upcoming 5G service. The latest signal in that drive
is coming from the country's state planner, which has just
announced that five or more cities will start to build rudimentary
5G networks starting next year.

All this may sound quite boring for many of my readers who are more
interested in high-tech companies than stodgy telecoms carriers.
But it really has huge implications for not only China's big 3
telcos, but also the nation's booming Internet industry that will
become the direct beneficiaries of 5G networks that offer data
speeds that are well ahead of what you can get from current 4G
technology.

The shift we're now seeing has been bubbling about for much of the
last half year, as both telcos and China's telecoms regulators
increasingly discuss 5G technology. Similar discussions occurred in
the past, even though China ultimately chose to wait until the new
technologies were more mature before launching its own new
networks. That typically meant that China was anywhere from 2-4
years behind the rest of the world in 3G and 4G, allowing it to
benefit from more mature technology but cutting it out of any role
in development of those technologies.

Having spawned telecoms equipment giants Huaweiand ZTE(HKEx: 763; Shenzhen: 000063),
not to mention Internet giants like Tencent(HKEx: 700) and Alibaba(NYSE: BABA), national
leaders are just now finally realizing that perhaps it's to their
benefit to be more active in creating the next generation
technologies than just playing follower. The latest report from
the National Development and Reform
Commission (NDRC), China's state planner, reinforces the
steady string of recent signals.

According to that report, the NDRC wants to see rudimentary 5G test
networks set up in at least 5 major cities next year, with each of
those networks including at least 50 base stations. (Chinese article) No particular cities are specified,
but the NDRC says it wants to see networks in the Yangzte River
Delta centered on Shanghai, the Pearl River Delta centered on
Guangzhou and in the Beijing-Tianjin-Hebei area of northern China.
Those networks would form the core for future much-larger
commercial networks.

This latest announcement continues the string of signals I
mentioned earlier, which are coming from the Ministry of
Industry and Information Technology (MIIT), as well as the
big three telcos, China Mobile(HKEx: 941; NYSE;
CHL), China Unicom(HKEx: 762; NYSE; CHU)
and China Telecom(HKEx: 728; NYSE: CHA).
We saw two other signals last week, including word that third-stage
trials were beginning for 5G by the MIIT, and a report from
China's state broadcaster saying the three telcos would start
building networks next year, which seems to be another version of
latest NDRC announcement. (English article)

If China really sticks to its guns, it is expected to launch 5G
commercial service around 2019 or 2020, which would be roughly in
step with the rollout of commercial networks in the West. That
would translate to a spending bonanza that should benefit Huawei
and ZTE, which seem to get at least 50 percent or more of the
contracts from the big Chinese telcos these days.

The rollout of networks in step with the rest of the world should
also work to all of the internet companies' benefit, as it will
allow them to experiment more with high-data functions. More
innovation by the Internet companies should also help the big
telcos, which should see surging demand for their services as a new
generation of data-hungry functions hits the market. Among those I
would expect to see China Mobile continue its dominance, with the
smaller China Telecom and Unicom continuing as relative
laggards.